Fighting for change in an age of red capitalists

THOUSANDS of Chinese Communist Party delegates, including billionaire industrialists and a teenage Olympic gold medallist, assembled in Beijing on Thursday to witness the coronation of a new generation of red emperors.

For better or worse, they will govern the world's second-largest economy and the most populous nation for the next decade. It is probable that China will surpass the United States as the largest economy during their reign.

The 18th Party Congress will be convened without the theatrical fanfare of the US presidential election. But its impact will be arguably even greater for Australia and the region.

It is commonly acknowledged that China has once again reached another inflection point in its long march to be a modern and prosperous nation. The unwritten social contract between the ruling party and the 1.3 billion ruled needs to be redrawn.

For the past three decades, the party has provided uninterrupted economic growth for a once poverty-stricken country and much-needed social and political stability after years of Maoist political extremism.

However, the Chinese model of heavy infrastructure investment and export-led growth is showing signs of fatigue. The doyen of Chinese economists, Wu Jianliang, has repeatedly said the country has reached a threshold of economic and social tensions.

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Leading reformist newspapers have urged Beijing to implement a comprehensive economic and social reform agenda to steer China away from the so-called middle income trap, when developing countries fall short of their full growth potential.

The outgoing party chief, Hu Jintao, said the key to resolving all of China's mounting problems was sustained economic growth, and central to that was tackling the vexed issue of the relationship between the government and market.

Though China has long ditched a Maoist command economy, it is only halfway to a fully mature market economy. The ''visible hands'' of the government are still disproportionately influential in the running of the economy.

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State-owned enterprises, which are affectionately known to the Chinese party leaders as the ''elder sons of the republic'', are dominating key sectors of the economy and sucking oxygen out of the dynamic private sector.

The big four state-owned banks have managed to squeeze large monopoly rents out of the long-suffering Chinese depositors, which easily dwarf the combined profits of some of the best private companies in China.

Chinese banks have long favoured their state-owned counterparts in the credit market. Cash-strapped private companies have been forced to borrow at usurious rates from loan sharks to sustain their operations.

The real litmus test for Beijing's avowed goal to deepen economic reform is its willingness to take on the powerful vested interests of its red capitalists.

It is no easy challenge. Some of the biggest and most powerful Chinese state-owned enterprises were former government ministries. Their chief executives still enjoy status as cabinet ministers and have strong influence over government policies.

Some commentators argue that China's state-owned oil companies are outmanoeuvring the foreign ministry in some parts of the world. Indeed, the ministry building in Beijing is literally being overshadowed by the imposing headquarters of these oil giants.

Early this year, a joint World Bank and Chinese government report argued that the long-term prosperity of the Chinese economy depends on Beijing reforming the state-owned sector. China's red capitalists have ferociously resisted the change so far.

Hu's opening speech at the 18th Party Congress has sent out mixed messages about the future policy direction in this vital area.

He said market-based rules must be respected and the government would unreservedly support the expansion of the private sector, ensuring a level playing field for state and private sector players.

Despite the lofty rhetoric of encouraging the private sector, the retiring party chief said the government would also support the continuation of the state-owned enterprises. It is unclear how his successors will walk this tightrope.

Reform of the state-owned enterprises has added significance for another announced goal of the Chinese government, namely the further integration of the Chinese economy with the world. Hu said the country needed to accelerate the pace of its '' going out'' strategy.

Chinese overseas investment led by state-owned enterprises has fast become one of the most sensitive issues between China and many of its trading partners, including Australia and the US.

In fact, it is one of the key issues holding back the tortured negotiations between Canberra and Beijing over a free trade agreement.

Chinese leaders have a strong record of implementing a difficult and challenging economic reform agenda since the late 1970s, though there were signs of reform fatigue in the twilight years of the Hu-Wen administration.

We can be cautiously optimistic that new leaders can pull this one off again. But China's red capitalists will not make their job easy.